Stock Market Co-movement and Shock Transmission: Islamic versus Conventional Equity Indices

Dewandaru, Ginanjar and Alaoui, AbdelKader and Bacha, Obiyathulla and Masih, Mansur (2014): Stock Market Co-movement and Shock Transmission: Islamic versus Conventional Equity Indices.

Abstract

Our study measures co-movements in Islamic and conventional equity markets, to discover contagion and to measure integration level. We apply wavelet decomposition to unveil the multi-horizon nature of co-movement. We find that the subprime crisis generates fundamental-based contagion for both markets. The less exposure for some Islamic indices can be due to low leverage effect and the exclusion of conventional financial stocks. We also find higher fundamental integration for Islamic markets, attributable to their allocation related to the real sector. Finally, we show a leading role of the LIBOR negatively over Islamic indices in the long run.

• Item Type: MPRA Paper
• Language: English
• Keywords: Islamic finance, Shariah, Shock transmission, financial crisis, contagion, interdependence, market integration, wavelet analysis, wavelet coherency
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics

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